With Apple ( AAPL), it's all about how much you believe. The computer company won over many skeptics last year with the phenomenal sales of its iPod music player. Although known as a niche company, Apple hopes to build on that success by going downmarket,
introducing on Tuesday a new low-cost computer and a cut-price iPod player. However, the company's first-quarter earnings report after the closing bell Wednesday may be a good indication of how far the company has to go. Many analysts believe Apple is making the right moves to extend its dominance in MP3 players and to grow its computer business. The new products, particularly the low-priced Mac mini computer, "will attract new users to the platform," said Tim Deal, a senior analyst with Technology Business Research. (Deal has no position in Apple shares and Technology Business Research does not do investment banking.) But not everyone's convinced. Apple's latest products indicate that it's attempting to move away from the niche toward being a mass market company, said Eugene Walton, an analyst with Walton Holdings. But Apple hasn't shown that there's a mass market for its computers, nor that it can operate with the same efficiency -- and razor-thin margins -- that mass market companies typically work with, he said. "They haven't proven that they have mass-market skills," said Walton, who has no position in Apple shares. Walton Holdings does not do investment banking. Walton's not the only doubter. Despite getting positive press, Apple's stock dropped on Monday following the product announcements. The company's shares closed regular trading off $4.40, or 6.4%, to $64.56. Apple has long been a company with more than its share of believers and critics. The company has built a loyal customer base with its user-friendly software and its cutting-edge features and designs. Despite the consolidation and increasing commoditization of the PC industry, Apple has been able to thrive in its own way in large part due to its innovations.
But the company has seen its share in the PC market continually slip away. And while its innovations often have resulted in market dominance, its supremacy has many times slipped away under pressure from lower-cost competitors. In spite of this, Apple has found new believers with the introduction of the iPod. The company has sold some 10 million of the digital music players all told, including 4.5 million in its just-completed quarter. According to company CEO Steve Jobs, Apple's share of the digital-music player market has grown from 31% in January 2004 to 65% now. The success of the iPod helped Apple post strong growth last year. The company's sales, for instance, jumped 33% in fiscal 2004 from a year earlier. And its net earnings increased 300%. On the strength of those results, Apple's stock price soared more than 200% last year. The company now trades at about 43 times its projected fiscal 2005 earnings. With Apple's fiscal first-quarter earnings due on Wednesday, Wall Street is forecasting more of the same. Analysts predict that Apple will post earnings of 48 cents a share on $3.15 billion in sales, according to Thomson First Call. That's above the guidance Apple gave in October, when the company projected it would earn 39 cents to 42 cents a share on sales ranging from $2.8 billion to $2.9 billion. Many analysts think the company will be able to drive further sales and earnings growth through its iPod. The new iPod Shuffle -- with a price starting at $99 -- is targeted at the low end of the digital-music player market, where Apple heretofore did not have a presence. "The iPod Shuffle opens up new market opportunities," said Goldman Sachs analyst David Bailey in a research note issued Tuesday. "The combination of existing iPod strength and the iPod Shuffle should deliver iPod units above our current estimates. ... it virtually ensures that Apple will pick up more share in the market it already dominates." (Apple has been an investment banking client of Goldman Sachs in the last year.)
But Apple will do more than just sell more music players, many analysts believe. The iPod is creating a "halo" effect that will attract new customers to its Macintosh computers, they argue. The biggest impediment the company has faced in recent years to drawing new Mac users has been the price of its products, said Deal. The new Mac mini -- with a price starting at $499 -- helps to set aside that objection, he said. "For Apple to introduce a low-end Macintosh computer at a price point I feel to be competitive with Windows computers is significant," he said. "Apple's biggest customers are its install base. This is about getting people into the entry level -- and securing future revenue opportunities." But others remain unconvinced. Walton, for instance, thinks there is only a limited number of people willing to trade their PCs for a low-end Macintosh. Meanwhile, with the Mac mini, Apple runs the risk of cannibalizing sales of its more expensive eMacs and iMacs, he said. Such a result would be "terrible, because that's where they make their money," Walton said, noting that the company's profit margins on its Macintosh computers are higher than those on its iPods. "They've still got to sell Macs for this company to prosper."